Tuesday, 4 January 2011

Year of the Crazed Rabbit?

Business Mirror

Master Ming, quoted in the Russian newspaper Pravda, wrote the following about our New Year 2011: “The Rabbit is tame and docile, as well as a year which comes full of good energy. From this aspect, the world will have peace and prosperity. It will be a season for many crops planted for those who struggled in 2010. In the Year of the Rabbit, the world will have more understanding and be more prone to help those less fortunate. The world economy will continue to thrive. In politics, the Year of the Rabbit will bring diplomacy and negotiation. The growth of national economies will be slow and steady.”

While not wanting to argue with 2,500 years of Chinese legend, culture and history, I believe that 2011 is going to be far from tame and docile. It is the year of the Metal Rabbit. But 2011’s Rabbit may be wild-eyed and crazy, with sharp teeth and sharper claws, pumped up on steroids and methamphetamine, carrying a metal Uzi submachine gun, loaded with hollow point bullets.

The media and particularly the financial press would like you to accept the sweet, meek bunny rabbit image for 2011. Yesterday the BusinessMirror published an article from Bloomberg, the ultimate mainstream financial organ. The headline read “Dollar gains most against euro since 2005.” Well, that certainly sounds positive until you read the second paragraph: “The US currency weakened against 12 of its 16 major counterparts.”
The implication of the article is that as long as the dollar is strong against the other largest economic bloc in the world, all is good and wonderful. Reality is a nasty factor when you are trying to spin the truth.

While the dollar may have been up 6.5 percent against the euro, that fact means nothing. The story of 2010 is how bad the dollar performed against the only true global currency—gold. The dollar dropped 30 percent against gold in 2010. Silver appreciated 80 percent against the dollar. The other sad reality is that commodity prices, from metals to food products, rose 20 percent in dollar terms in 2010 and the trend is strong, with momentum; up. Global economic growth, if we accept the often politically inspired numbers, is confined to domestic production in the emerging markets. This is a clear indication that the two dominant characteristics of 2011 will be high inflation combined with very slow economic growth, the worst of all possibilities.

Commodity prices require careful inspection for 2001. The crazed rabbit could go either way, both paths being very undesirable. The first scenario is that prices will continue higher, fueling high inflation in countries like the US that cannot revalue their currencies higher (like the Philippines) to tame price increases. The other possibility is that the world’s major buyer, if not actual consumer of commodities, will run into big problems in 2011. The Chinese have spent hundreds of billions to keep economic activity robust, building, for example, 64 million still unoccupied residential units. Funded by China’s own version of “money printing,” these units were built at a cost and, therefore, priced for sale to buyers making 10 times what the income is of the average Chinese. This cannot continue much longer.

Two drivers have been behind commodity prices in 2010: a weak dollar and Chinese buying. A continued weakling of the dollar will push oil and food commodities higher in 2011. That is almost guaranteed. However, if China slows down its buying, other commodity prices could drop, and putting resource-dependent countries like Australia in deep trouble.

While the US has been able to keep the collapse of its banking sector pushed into the future, and Europe has been able to do the same with its bankrupt nation-states, the worst may still come in the second-tier nations. Canada’s housing bubble is on the brink of bursting. Canada is dependant on oil revenue and the US market. The housing boom was fueled in large measure by the expectation of bringing great oil-shale reserves online that are now far too expensive. Another US-dependent nation, Brazil is heading for a rude wake-up call. The central bank is already raising the deposit requirements and rates, as several major banks are teetering on the brink.

Other countries mostly off the radar like Hungary will contribute to the potential chaos of 2011. While the focus is on larger European Union members like Spain, Fitch (and Moody’s before) ratings service just downgraded Hungary to one notch above junk status. But who cares about a little country like Hungary? The German banks that own their debt that’s who.

2010 was marked by mostly liberal/socialist governments willing to create false wealth through failed economic policies, such as in the US. Economically, leftist governments from the US to the United Kingdom, Spain, Greece and countless others are facing major political upheaval in 2011. As seen in the recent US election, voters will turn to what they consider more fiscally responsible governments. Spanish moderate-right opposition People’s Party holds the widest preelection poll lead in history. One of two things will happen. These new governments will continue “business-as-usual,” sinking their nations more into the dark hole of useless debt. Or, prudent economic policies will be followed by a large contraction of global economic activity in 2011, in the hopes of building stronger but smaller economies for the future. Either way, this not going to be a tame and docile bunny-rabbit year when the world will have peace and prosperity.

In the Catholic liturgy, the priest asks that the Lord “grant us peace in our day.” And “Lord Jesus Christ, you said to your apostles: I leave you peace, my peace I give you.” We tend to think of this as following the modern concept of the Latin word pax, meaning free from war and conflict. But Jesus was probably drawing from the Hebrew meaning of the word peace (shalom), a concept of safety, security, health and prosperity, in a world of utter strife and chaos.

In that proper sense, 2011 will be a peaceful year for the Philippines.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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